If anyone was hoping that opening up the Saudi stock exchange to international investors would provide a timely pre-Ramadan boost to the market, they will have been disappointed. Foreign investors were allowed to start trading shares on 15 June, three days before the start of Ramadan, but the market held to its usual pattern ahead of the holy month and the Tadawul All-Share Index fell for the next five days.

The muted impact may suit the authorities, who have taken a very cautious approach to opening the market. The move had been discussed for many years and there are still plenty of restrictions on who can buy shares and how much they can own.

It is a different story in the wider economy, where the country could do with finding new ways to boost activity to offset the impact of low oil prices. The economy benefitted earlier this year from the SR110bn ($29bn) ‘accession bonus’ handed out after King Salman came to the throne in January. That provided a fillip, but the impact is already wearing off

“The non-oil sector was given a boost by the accession bonus that was worth around 2.5 per cent of GDP,” says Jason Tuvey, Middle East economist at London-based Capital Economics. “Consumer spending has strengthened, but this is temporary and there are already signs that consumer confidence is starting to fall back. Eventually activity in the non-oil sector is going to slow again.”

A slowdown in the second half of this year and on into next year now looks the most likely scenario. Capital Economics is predicting growth of just 1.5 per cent next year, well below the 5-6 per cent seen over the past decade. Others are slightly more optimistic, but their figures point in the same direction. The IMF thinks the economy will decelerate from 3.5 per cent growth this year to 2.7 per cent next year.

At the heart of the issue is lower oil prices which are leading to lower government revenues. The government has been increasing oil production in an effort to maintain its market share. Saudi crude oil production rose above 10 million barrels a day (b/d) in April and exports were at 7.9 million b/d in March, the highest level in almost ten years. However, prices are not expected to increase anytime soon, which is putting pressure on the government’s budget.

The IMF reckons the government will run a deficit of 20 per cent of GDP this year. “A sizable fiscal policy consolidation will be needed over the next few years to put the deficit on a gradual but firm downward path,” warned the IMF’s Tim Callen in early June, after visiting the kingdom as part of the organisation’s annual review of the Saudi economy.

The government has the twin benefits ofhigh reserves of around $680bn and debt of less than 2 per cent of GDP. That gives it plenty of room to manoeuvre – it can both draw down reserves and issue debt to cover its budget deficit, meaning that it will not have to cut spending as aggressively as it otherwise might.

“We think the government will use both [reserves and debt] to maintain elevated spending,” says Fahad Al Turki, chief economist at Riyadh-based Jadwa Investment. “We might see an announcement on government issuing debt within the next three months. We expect an issuance of SR200bn and that will take care of around half of the deficit. The other half will be financed by drawing down the reserves.”

Although there is little doubt that Saudi Arabia’s government can afford to keep spending, the pot of money isn’t limitless. Local bank Samba says the fiscal outlook “is a concern” and it expects the government to keep a break on spending until sometime during 2017-20 when it thinks the oil price will start to recover.

This is troubling because the Saudi economy still relies heavily on government spending, both directly through state-funded projects and indirectly as much of the private sector activity is closely tied to government initiatives. Jadwa Investment estimates that capital spending will be cut from around SR370bn last year to SR270bn this year. While this is still high in historic terms – in 2005 the figure was just SR62bn – the combination of low oil prices and lower state spending is bound to have an impact on the private sector.

“There is a correlation between sentiment in the private sector and the oil price. When oil prices fall sentiment tends to go down and investors and private sector players become more cautious,” says Al Turki.

How different parts of the non-oil economy react to any slowdown remains to be seen. The most recent purchasing managers index produced by Markit, which offers a snapshot of activity across the non-oil private sector, saw expansion slow in May to its weakest level in a year, but it remains firmly in positive territory.

The country’s banks are in good shape, with strong profitability and liquidity. However, lending to consumers and corporate borrowers has been slowing this year. Growth in bank credit to the private sector was up by 9.5 per cent year-on-year in April, its lowest level for four years.

Among other sectors, the construction industry has been hurt by the clampdown on migrant workers over the past few years and will also be affected by any cuts to government project spending. Al Turki suggests that the export-oriented sectors such as petrochemicals and plastics will find conditions toughest in the future, due to weak global demand.

All this serves to emphasise the importance of two policies the government has been following in recent years: diversifying the economy away from oil and getting more locals into work, particularly private sector jobs. While there is no doubt that these policies are essential for the long-term health of the economy, it is questionable how effective the authorities have been at executing them. “The problem is not with the policy, it’s with the implementation,” says one consultant who advises the Saudi government.

With a slowing economy and continued low oil prices it will become ever more important for the government to ensure that these policies are more effective. It won’t be easy though. The more restrictive budget conditions mean the government will not be able to absorb as many locals coming into the jobs market, but a slower economy will also mean that the private sector is likely to provide fewer jobs opportunities. As the consultant adds “there is no silver bullet”.